• Andrea Murray

Retrocession Fees Seen as Biggest ETFs Flow Hurdle

Updated: May 10



This week VanEck launches a thematic ETF that offers exposure to companies involved in the cryptocurrency and blockchain industries, April ETF flows are published in the U.S. – no shock here – they are positive, and a Blackwater Search survey finds that 36% of European mutual fund managers find retrocessions to be the biggest hurdle for European ETF flows. Read on for more top ETF highlights from this week.


Fund Launches and Updates


Legal & General Investment Management has launched a global equity fund based on ETFs targeting eight investment themes -- artificial intelligence, robotics and automation, cyber security, battery value chain, clean water, e-commerce logistics, healthcare breakthrough and pharma. Link


VanEck has launched Europe’s first thematic ETF that offers exposure to companies involved in the cryptocurrency and blockchain industries. The VanEck Vectors Digital Assets Equity UCITS ETF (DAPP) is listed on the London Stock Exchange and Deutsche Boerse with a TER of 0.65%. Link


In the U.S., more active ETFs are introduced as Fred Alger Management has launched an active ETF of 35 stocks to be run by CEO Dan Chung. The new ETF will follow a similar strategy to the firm’s existing Alger 35 mutual fund, which launched in 2018, has $20m in assets. Link



Flows


Flows into UCITS ETPs fell last week to $2.8B across asset classes, vs. a weekly average of $4.4B since the beginning of March. This slowdown was mainly driven by a drop in equity buying ($1.1B), while fixed income flows remained positive for a fourth consecutive week, with $1.4B added. Sentiment towards commodities turned positive after the previous muted week, resulting in a net buy of $389m. Link


The European ETF market is set to hit at least $2.5trn assets under management by 2025, according to a survey conducted by PwC, a growth rate quicker than even in the US. The survey, which interviewed 60 global ETF players including issuers, market makers and administrators, found 85% of European respondents have predicted ETFs to pass $2.5trn by 2025, a 21% compound average annual return (CAGR). This is a faster predicted growth rate than the US with 90% of respondents predicting the market will hit $9trn AUM by the same period, a 16% CAGR. Link


In the U.S., investors added $74.2 billion to the ETF space. U.S. equity ETFs picked up the lion’s share of new assets—$31.8 billion—followed by U.S. fixed income ETFs at $22.3 billion and international equity ETFs at $17.4 billion. With four months in the books, U.S.-listed ETFs have pulled in a net $320.3 billion in fresh cash, well ahead of last year’s $121.1 billion pace.


On a year-to-date basis, the ordering is slightly different: U.S. equity ETFs are in the lead with $152.2 billion of inflows, followed by international equity ETFs at $100 billion and U.S. fixed income ETFs at $53.7 billion. Link


Noteworthy

There are a number of structural issues hampering the continued uptake of ETFs in Europe, however, none are having a bigger negative impact than the retrocession fee model that encourages banks and advisers to place investors in more expensive funds in return for larger fees. Last week, the Blackwater Search & Advisory survey of 100 European mutual fund managers revealed 36% found the retrocession fee model as the biggest factor holding back ETF growth in Europe. Do you agree? Link


The number of US mutual funds is shrinking at the fastest pace in at least two decades, reflecting cost pressures and consolidation across the investment industry and strong competition from exchange traded funds. After peaking at 9,616 in 2018, the number of outstanding US mutual funds has fallen towards 9,000, the lowest level since 2013. A total of 644 mutual funds were shut or combined last year, the highest figure since 2009. Meanwhile, the number of mutual fund launches, 268, was the lowest since the ICI began compiling data in the late 1990s. The number of new ETFs rose to a record 313 in 2021 although, reflecting their growing maturity, there were also a record 182 ETF liquidations last year. Link

Domestic fund managers in Taiwan are rushing to roll out new exchange traded funds that carry an ESG label, plugging into the continued appetite for the low-cost passive vehicles and rising popularity of sustainable investing. Sustainable investing and ETFs have been two of the biggest draws for Taiwan investors since last year. While assets in ESG-themed funds in Taiwan jumped fourfold in 2020 to $3.21bn, the country’s ETF market also ballooned, with assets under management growing 135 per cent in the past two years. One in four Taiwanese investors in their 20s now hold ETFs. Link


The global race for bitcoin ETP launches continues as Aussie ETF manager BetaShares and global investment firm VanEck have both filed for Bitcoin ETFs with the Australian Securities Exchange. Link


The booming ETF industry may be set to lure even more cash in the coming years as rich Americans facing higher capital gains taxes look to limit what they owe. President Joe Biden’s plan to double the rate those making more than $1 million a year pay on investment profits would accelerate a shift that’s already seen hundreds of billions of dollars migrate from mutual funds to exchange-traded funds. That’s because ETFs (in the U.S.) are generally more tax efficient, spinning off fewer capital-gain disbursements that for some could soon become a lot more costly. Link


Capital Group’s American Funds is gearing up for its entrance to the ETF market.

The Los Angeles-based shop is one of the last large asset managers to offer ETFs. American Funds is the third largest mutual fund manager, with $2.1tn of assets under management, which represents around 11% of the market. American Funds originally licensed Precidian’s ANT ETF structure and has now announced that it will also use Fidelity’s methodology. Link

U.S. regulators are taking their time evaluating the growing number of bitcoin exchange traded fund proposals. But backers of such products are wasting no time to ensure they have the vendors in place to keep them humming if they are approved - the early winner in the cryptocurrency ETF service provider contest is BNY Mellon. The New York-based bank has secured administration and/or transfer agency contracts with three of the eight bitcoin ETFs that have filed registration paperwork with the Securities and Exchange Commission, according to public announcements and regulatory disclosures. Link


In case you missed it…

The cicadas are coming – well thankfully not here in Europe but in the U.S. After 17 years underground and known to be one of the “craziest lifecycles of any creature on the planet”, billions of these red-eyed locust-like creatures will be emerging from the ground along the east coast of America. Many dread this swarm due to the size of the bugs, the noise, and mess they make but others are fond of cicadas – and even munch on them, using recipes like those in a University of Maryland cookbook. Hard pass for us.




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